The CARD Act Is The Gift That Keeps On Giving

The CARD Act is the greatest piece of consumer finance legislation in my life time.   I have written dozens of articles here in support of it when it was a bill, and many more articles praising it when it became law.   No, banks did not stop offering frequent flier miles and cash back since CARD became effective.   To the contrary, banks are now making less money off of fees from tricks and traps, so they are marketing even more aggressively towards high spenders with great credit who pay their bills.   This has meant that we are seeing more sign up bonuses worth two or more round trip domestic airline tickets.

CARD Rolls On

Most of the provisions of the CARD Act became effective earlier this year,  but I just read about a new feature of the law that will only be taking effect this summer.   The CARD Act mandates that the Federal Reserve Board take steps to curb unfair fees and other practices.   In this press release, they outline some new changes that are going into effect beginning on August 22d.

The new rules include:

• A $25 cap on late fees.
• Late fees may not exceed the minimum payment or the total amount owed.
• A ban on inactivity fees.
• A ban on assessing multiple penalty fees for a single missed payment.
• A request that credit card issuers reconsider rate increases from last year, before the CARD Act became effective.

What Does This Mean For You?

No more $39 late fees.    The Federal Reserve Board decided that $25 was reasonable, and I think that is a fair compromise.   Better yet, they took the common sense approach of prohibiting the fee from exceeding the amount owed.    As it stands now, you could owe a $39 late fee on a $5 outstanding balance, which is outrageous.    For lower income people who (hopefully) have lower balances, they would not see a $25 late fee because their minimum payment is likely to be less.

The “inactivity fee” is a really bizarre thing.   Some banks have recently started adding an annual  fee of a few dollars to cards that have not been used in 12 months.     This brings up the question, why does anyone have a card they are not using?   Some may keep the card as a backup, or not cancel it on purpose to have a longer credit card history.    Much more likely is the possibility that the cardholder simply forgot they had the card.  The fee is typically waived if the cardholder just cancels their card anyways.   Either way, it doubtful that all the “inactivity fees” collected by any one bank equals the salary of a single customer service representative.   Nevertheless, it is good that the Fed is killing this fee before this idea became popular and was implemented on cards that were inactive for less than a year, or cardholders that did not spend a minimum amount.

I am not sure about the part of multiple penalty fees for a single missed payment.   I assume some bank must be doing it, so it can only be a good thing that the Fed has prohibited this.

As for the request that banks re-evaluate interest rate hikes, this is the most controversial part of the new rules.    According to this article in the USA Today, Gail Hillebrand, attorney for Consumers Union, said in a statement:

“The Fed should be commended for prohibiting inactivity fees and imposing some clear limits on penalty fees when customers are late making their payments, But the Fed missed an opportunity to require a rollback of all the outrageous interest rate hikes consumers have been slammed with in recent years.”

I agree with her that it would have been better if the Fed rolled back interest rates, but I am not sure that they even had the power to do so.     Dictating a rollback is a pretty brute force measure, and the banks would have pushed back in the courts as regulatory powers are not easy to exercised retroactively.

The hike in interest rates leading up to the effective date of the CARD Act was one of the biggest failures of the legislation.    Consumers rightfully concluded that banks were getting in their last licks while they still could.  It was as if a judge let a serial criminal free on no bail for a few months to seek revenge on his enemies before serving his sentence.   The interest rate hikes were dramatic, and bore little resemblance to any market forces at that time of record low interest rates elsewhere.  It will be interesting to see if some banks actually do reconsider interest rates on cards.   I am not optimistic.